[BETA] Fortnightly

New England Electric System (NEES) and the majority leaders of both houses of the Rhode Island Legislature have proposed legislation that would restructure the state's electric utility industry. The legislation provides for full recovery of all stranded costs, and phases in open access for all retail customers by January 2001. Although customer choice would come about relatively quickly, rates would not decline much in the near term because a transition charge shields NEES from most of the restructuring risk. Indeed, NEES may be able to earn more under the proposal than it would under traditional regulation.

Narragansett Electric, a NEES subsidiary, serves 75 percent of Rhode Island's retail load and buys power under an all-requirements contract from New England Electric Power, another NEES subsidiary.

Proposed Structure

Customers would receive the right to choose their own power supplier according to the following schedule:

s January 1998 (em Manufacturing customers with demand over 1,500 kilowatts (Kw) and all new customers with demand over 200 Kw

s January 1999 (em All manufacturing customers with demand over 200 Kw

s January 2000 (em 50 percent of remaining customers in each rate class

s January 2001 (em All remaining customers.

This schedule would accelerate if competition develops rapidly in the rest of New England. If consumers of 50 percent of the electricity in New England become eligible to choose their own power supplier at any time before January 2001, open access would be extended to all Rhode Island customers within six months.

The proposal separates generation, transmission, and distribution into distinct business entities, and requires the state's utilities to file four separate unbundled rates by January 1997: 1) a cost-of-power rate, 2) a transition charge, 3) a transmission rate, and 4) a distribution rate. The cost-of-power rate would apply only to customers that continue to purchase power from their native utility; those that choose an alternative supplier would negotiate with the supplier on price. The other three rates would apply to all customers, whether they choose an alternative supplier or not.

The transition charge collects a termination fee for NEES as compensation for releasing customers from their obligation to buy its power. The termination fee is equal to the sum of NEES's stranded investment, regulatory assets, nuclear decommissioning costs, and the present value of its uneconomic purchased power.

The stranded investment portion of the termination fee will equal the "net unrecovered capital cost of generating plants ... as of January 1, 1998," but explicitly excludes the operation and maintenance (O&M) expenses of generating facilities. Thus, all generating plant investment is treated as stranded investment, and NEES is responsible only for O&M expenses. This is tantamount to the state buying the generating facilities at book value, leasing them back to the company without charge, and paying for them with installments over 12 years, after which ownership reverts to the company.

The transition charge includes a return on the unamortized balance of the termination fee at a rate of one percentage point above the yield on long-term utility BBB-rated utility bonds, or about 8 percent. A low return offsets